HMRC warns that owners must accurately declare these earnings on their self assessment tax returns or face criminal charges if in default.
A boom in bookings
The Covid pandemic has stored up excess demand for stay at home Britains under the foreign holiday restrictions. May holiday lets are booked up as far as the end of next year as people rush to secure a home-based holiday in 2022.
The demand in the market has resulted in a wave of new investment in holiday lets, as property prices have reacted to this increase in demand. Also, many long-term letting landlords are switching to short-term holiday lettings, which are more profitable.
Fully booked holiday let owners have been banking bumper profits over the last year or more and this looks set to continue. HMRC is warning the owner landlords that their increased profits need to be properly accounted for and declared, or risk criminal charges for tax evasion.
Self assessment tax returns can be submitted from 31 October until 31 January 2022. HMRC are urging holiday let owners to make a full disclosure of their earnings or risk triggering a tax investigation.
For those landlords who think they may get away with not declaring their full earnings, HMRC says it has many ways of routing out information which shows the true earnings of holiday lets. It monitors advertisements and has the power to retrieve information from holiday booking websites about a landlords bookings.
Through statistical analysis HMRC can estimate earnings quite accurately and any tax return which falls outside an estimated range of what the earnings should be will likely trigger further investigation.
Airbnb type lettings also boomed during the crisis so landlords and house owners who use the service to rent on a casual basis need to be aware that this revenue is also taxable income.
Airbnb has agreed to share information on their user owner’s earned income generated through its letting website as part of a resolved settlement with HMRC. Under the settlement Airbnb has agreed with HMRC that it will pay an extra £1.8million in tax while sharing its data on its users incomes.
Accountancy group UHY Hacker Young partner Neela Chauhan has said that owners of holiday flats and cottages will soon need to file self-assessment tax returns covering the first year of the Covid-staycation boom, before next year’s 31 January deadline.
Neela Chauhan warned: “Many will be tempted to under report the windfall earnings they have made in that period.”
She went on, HMRC statistical algorithms and AI systems will easily identify holiday homeowners who under-declare income:
“Landlords who fail to declare unpaid taxes are ultimately risking fines and criminal prosecution.”
With holiday lets fully booked and some owners hiking prices, earnings have surged by over one-third and in some cases by three times the usual annual income.
A HMRC spokesperson has said:
“HMRC believes that the vast majority of customers want to pay the right amount of tax, including owners of UK holiday lets, and we will continue to work with such customers to help them to get their tax right.
“People with additional income streams may not be fully aware of their tax obligations and so we have taken steps in HMRC to consider sectors, such as short-term property letting, where we may not be collecting the full amount of tax owed.”
The boom in demand for holidays at home has made the prospect of owning and managing a holiday let business more appealing. One holiday cottages agent has reported a 40 per cent increase in enquiries in the last 12 months.
The prevailing ultra low interest rate environment, and the prospect of an increase in inflation, has savers looking for a good home for their money. What could be more tempting than physical property to keep pace with inflation and the prospect of windfall profits?
However, holiday let owners need to be aware that this is a business, one that needs a lot more management time that long-term lets, with attention to the detail of accurately reporting earnings if landlords are to stay on the right side of the law.
Special tax rules
There are some special tax rules for rental income from properties that qualify as furnished holiday lettings (FHLs).
If you let properties that qualify as FHLs:
– you can claim Capital Gains Tax reliefs for traders (Business Asset Rollover Relief, Entrepreneurs’ Relief, relief for gifts of business assets and relief for loans to traders)
– you’re entitled to plant and machinery capital allowances for items such as furniture, equipment and fixtures
– the profits count as earnings for pension purposes
To benefit from these rules, you need to work out the profit or loss from your FHLs separately from any other rental business.